SEC files charges against hedge fund founder Cohen

Originally published July 19, 2013 at 5:22 pm

Updated July 19, 2013 at 7:31 pm

The Securities and Exchange Commission leveled its most direct shot against billionaire hedge-fund manager Steven A. Cohen on Friday by filing civil charges that accuse him of failing to prevent insider trading.

The Securities and Exchange Commission leveled its most direct shot against billionaire hedge-fund manager Steven A. Cohen on Friday by filing civil charges that accuse him of failing to prevent insider trading.

The SEC alleged that Cohen, who founded and runs SAC Capital Advisors, failed to prevent two of his portfolio managers from illegally reaping profits and avoiding losses of more than $275 million. Both managers provided information to Cohen in 2008 that suggested they had access to inside information, the SEC said. But rather than raise any red flags, Cohen praised one of the managers and rewarded the other with a $9 million bonus, the SEC said.

Cohen, 57, faces possible fines and could be barred from managing investor funds.

Cohen’s firm, which once managed more than $15 billion in assets, is at the center of one of the biggest insider-trading fraud cases in history. Four employees have already been criminally charged with insider trading – two of whom have pleaded guilty. And an SAC affiliate has agreed to pay $615 million to settle SEC charges of insider trading.

But legal experts said the SEC’s action against Cohen on Friday suggests that the government may not have enough evidence to charge him with insider trading. And rather than seek higher penalties in a federal lawsuit, the SEC chose to bring the case against Cohen before an administrative law judge at the regulatory agency, where the legal burden of proof is lower.

“They’ve opted for the home court advantage,” said John Coffee, a securities law professor at Columbia University.

Coffee said it is significant that the SEC did not charge Cohen with insider trading. That suggests none of his subordinates “flipped” and told investigators that they provided Cohen with information, he said.

A spokesman for SAC Capital said the allegations have “no merit” and that “Steve Cohen acted appropriately at all times.” Spokesman Jonathan Gasthalter said Cohen would “vigorously” fight the charges.

The SEC said that Cohen received “highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws.”

The managers that the SEC said Cohen failed to supervise face criminal trials in November. Former SAC portfolio managers Mathew Martoma and Michael Steinberg have each pleaded not guilty to insider-trading charges.

Two other former portfolio managers at the firm, Donald Longueuil and Noah Freeman, pleaded guilty in 2011 to criminal insider-trading charges.

Jon Horvath, a former research analyst who worked for an affiliate of SAC and reported to Steinberg, pleaded guilty to securities fraud last year.

Martoma is accused of earning $9 million in bonuses after persuading a medical professor to leak secret data from an Alzheimer’s disease trial between 2006 and 2008.

The SEC has alleged that Sidney Gillman, a doctor who moonlighted as a medical consultant, tipped drug safety data and negative drug trial results to Martoma two weeks before developers Elan Corp. and Wyeth made those results public in 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week.

Steinberg is accused of earning more than $1.4 million illegally in connection with trades involving Dell and Nvidia in 2008 and 2009. The SEC said Steinberg had information about both companies ahead of their quarterly earnings announcements.

Cohen, who lives in Greenwich, Conn., is one of the highest profile figures in American finance and one of the world’s richest men. He is among the handful of upper-tier hedge fund managers who pull in about $1 billion a year in compensation.

The SEC action against Cohen culminated a week in which the agency took significant enforcement moves involving prominent Wall Street figures. The actions could signal a new direction and strategy under SEC Chairman Mary Jo White, who assumed office in April.

Since the 2008 financial crisis, public and investor advocates have criticized the SEC for failing to hold high-level individuals on Wall Street accountable for misconduct. White pledged at her Senate confirmation hearing to pursue “all wrongdoers – individual and institutional, of whatever position or size.”

The SEC on Wednesday imposed a $13.9 million fine on Rajat Gupta, the former Goldman Sachs board member convicted of insider trading, to settle the agency’s related civil charges.

At a closed meeting during the week, the SEC commissioners rejected a proposed $18 million settlement that would have banned billionaire hedge fund manager Philip Falcone from the securities industry for two years. The deal, which was agreed to by the SEC’s enforcement staff, was voted down because it wasn’t tough enough.